It will be a short update this week. These days, I primarily comment on how I re-invest dividends flowing my way. I used some funds to add to Gilead Sciences a month ago. Last week, I increased my ownership of Abbvie.
Before we delve into why Abbvie is a buy, I must correct my last blog post where I wrote that Nvidia and Amazon didn’t pay dividends. This was, of course, only a half-truth. Amazon doesn’t pay a dividend but Nvidia does. You could argue that a dividend of 16 cents on a thousand-dollar stock, isn’t much of a dividend, but wrong is wrong. I stand corrected. Nvidia pays a dividend.
Ok, with that out of the way, let’s move on.
Past performance
I first bought into Abbvie during the early days of the pandemic. Stocks were cheap back then, so my total return in the name has been 2x. There were three causes for why I decided to initiate a position four years ago, and these causes are still present today.
An expanding moat
An economic moat is a durable competitive advantage that allows a company to maintain long-term profitability and fend off rivals. Companies with strong economic moats can charge premium prices, keep high margins, and defend their market position over extended periods.
AbbVie's economic moat stems from its portfolio of patented drugs and a robust pipeline of new drug candidates. The company has a strong position in arthritis therapies alongside its flagship botox treatments. Moreover, Abbvie is on its way to carve out a position in oncology. In my last blog post, I wrote about targeted chemotherapy, an innovative part of modern oncology, where Abbvie is a protagonist. Abbvie has also developed cancer immunotherapies in partnership with other companies. Furthermore, Abbvie is engineering tri-specific antibodies as cancer immunotherapies by collaborating on the TriNKET platform, thereby augmenting bispecific antibodies that current immunotherapy rests upon.
Hence, Abbvie’s moat is wide and it is getting wider.
Great capital allocation
There are five ways a company can allocate free cash flow. First, it can invest the surplus cash back into its business. Second, it can pay down debt. Third, it can acquire other companies. Fourth, it can buy back shares. Finally, it can give cash back to its shareholders in the form of dividends. In reality, it is a sixth way to allocate capital, and that is letting cash and short-term investments grow on the balance sheet, but this is only a deferral of doing one or more of the five expenses.
Abbvie’s management excels in purchasing small biotechs with promising clinical trials ongoing, a serial acquisition strategy that strengthens the drug portfolio both in the short and long term.
In 2020, Abbvie acquired Allergan, diversifying its portfolio from arthritis to neuroscience (mainly Botox). Since the Allergan deal, Abbvie has done other small acquisitions to bolster its neuroscience portfolio. Even more notable is the oncology acquisitions. In 2022, Abbvie bought into Genmab’s bispecific antibody platform and has since then; developed Epkinly in partnership with the Danes. This year, Abbvie finalized the acquisition of Immunogen, giving it a toehold into next-generation antibody-drug conjugates (ADC) where novel payloads, antibody formats, and site-specific conjugations are being explored.
Undervaluation
Despite Abbvie’s bull run, the share price is still undervalued, but not by so much as when I first bought into it. Currently, there is a 20 % upside to my fair value estimate. It must be stated, however, that only Cantor Fitzgerald has a higher price target than me on the Street. Thus, I am quite bullish on the name, maybe too bullish in the short term. Healthcare can have a tough time going into presidential elections. Post-election differences in the regulation landscape can be something that creates investor jitters.
Anyway, I invest for the long term. Abbvie has massive free cash flow and pays a generous dividend. Alas, you get paid to wait for price appreciation. That works for me.
Ps! I have written about Abbvie previously this year. If you want to read more about the company, you will find it very easily in the archive on this site.
Disclaimer: Important Information for Retail Investors
The information in this blog is for educational purposes only, not financial advice. Investing in stocks carries risks; past performance doesn't guarantee future results. Conduct thorough research and seek advice from financial professionals before investing.
The author is a retail investor, not a licensed advisor. Content accuracy isn't guaranteed due to changing market conditions. All investments have risks, including the potential loss of principal. Assess risk tolerance and goals before investing; diversification is key to managing risk.
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